Row House Exclusion Litigated

The National Community Reinvestment Coalition announced it filed a lawsuit today against the subprime lender charging it with violations of the federal Fair Housing Act for discriminating against minorities seeking housing in row house neighborhoods and those seeking financing for properties in American Indian Reservations and urban areas for adult foster care.

NCRC alleges “NovaStar’s underwriting polices and guidelines treat ‘Properties located on Indian reservations’ and ‘Properties for adult foster care’ as ‘Unacceptable’ for its lending business,” according to a copy of the complaint provided by the group. The lender allegedly also has a policy and practice of denying all loans for applications secured by row houses in Baltimore, Md., which has the purpose and effect of discriminating against African Americans and Latinos.

Applicants are excluded solely on the basis of property type without regard to the credit worthiness of the borrower and even if they meet the traditional lending criteria, such as a strong FICO score, low loan-to-value and/or debt-to-income ratios, steady income, and significant assets, the complaint adds.

“NovaStar intentionally structured its underwriting to exclude Native American tribal communities, persons with disabilities and row house neighborhoods where African Americans and Latinos reside,” NCRC President and Chief Executive John Taylor said in an announcement. “NovaStar discriminated against people with the least amount of ability to fight back. They did it because they thought they could get away with it.”

He added that he found it “ironic that NovaStar was peddling loans with exploding interest rates and exorbitant fees to minorities in more traditional neighborhoods” while denying credit to others who qualified for loans.

NovaStar has yet to receive the complaint, NovaStar spokesman Richard Johnson told MortgageDaily.com.

“We believe the accusations are completely without merit and NovaStar will defend against this lawsuit very vigorously,” he said.

NCRC alleges the subprime lender’s “discriminatory polices and practices” have been in place for a number of years and reflect its current business practices.

NovaStar’s practices “have also injured the NCRC by frustrating its mission of increasing fair and equal access to capital for underserved communities, and by requiring the NCRC to divert resources to investigate, eliminate, and counteract such practices,” the compliant reads.

The suit further alleges NovaStar’s no Indian reservation policy excludes nearly 42 percent of Native Americans from obtaining a loan from the company, as data shows that percentage of Native Americans live in Indian reservations, compared to nearly 2 percent of white homeowners living in those areas.

“Because NovaStar’s no adult foster care policy excludes homes typically licensed for people with disabilities, by definition it also has a significant disproportionate adverse impact on loan applicants associated with, or living with, persons with disabilities,” the complaint states, further noting that nearly one-fifth of the population has some type of “long lasting condition or disability” and will grow as the percentage of senior citizens increases.

NCRC’s complaint additionally said NovaStar responded it did not do row houses in Baltimore to two test callers requesting information on this property type in this area.

In a 2006 interview, Jim Croft, founder of the Mortgage Asset Research Institute, told MortgageDaily.com that he used to call “Baltimore the flipping capital of the galaxy.”

An effort by federal officials to crackdown on the property flipping and appraisal scams that had been rampant in Baltimore neighborhoods led to over individuals being sentenced in 2005. At one point, a rundown row house in this area that could sell for $15,000 could be over-appraised at $60,000.

“NCRC seeks a declaratory judgment, permanent injunctive relief, and damages for NovaStar ‘s unlawful behavior,” according to the announcement.

The lawsuit marks the first time the federal Fair Housing Act has been used to bring civil rights violations against lenders for refusing to make loans for row houses and adult foster care facilities, and is the first in a series where NCRC will challenge “overt discrimination that lenders are still perpetuating and regulators are failing to address,” according to NCRC’s announcement.